How Resilient Is India To Trade Upheavals?

Countries with large domestic markets should be able to weather the storm better

- howindialives.com

The imposition of reciprocal' tariffs across the board by US President Donald Trump plunged the world economy into deep uncertainty. Even their partial withdrawal, driven by sharp sell-offs in equity and bond markets, has lifted that uncertainty only somewhat. Underlying this is a deeper sense that the world economy and global trading system have undergone a fundamental structural shift away from the dominance of the US.

China's imposition of export embargoes on a range of crucial inputs into global value chains, such as rare earth metals, has only exacerbated this sense of uncertainty.

It's unclear whether a new global trading system will actually materialize, but the events of the past couple of weeks are a major test of a country's economic resilience, and its ability to withstand a downturn in, and shifts across, global trade.

Many countries, especially those in Asia, learnt this lesson the hard way. In 1997, the Asian financial crisis-fuelled by hot money flows, all-too-liberal capital accounts, and low levels of foreign exchange reservesalmost brought the then Asian tiger' economies to their knees. As a recent paper by Barry Eichengreen on economic resilience pointed out, this was a wake-up call to all economies in the region.

Countries strengthened banking systems, focused on building a large stockpile of foreign exchange reserves and became much more cautious about portfolio capital flows, which could flow out of a country at the first sign of trouble. These lessons stood those countries in good steadwhen the covid-19 crisis hit in 2020, Asian economies recovered relatively fast.

The restructuring of global trade, away from the US, is a subject that economists and analysts have speculated about for years, and Trump's tariffs mean that this restructuring is more likely to happen. Ifit happens, in the short term at least, it will lead to a severe disruption of global trade.